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Should You Consider Buying Tesco PLC, Walker Greenback plc And Severfield PLC?

Today I am looking at the investment prospects of three major London-listed players.

Tesco

I have long warned investors of the perils of investing in mid-level grocery operators like Tesco (LSE: TSCO). Along with its established rivals Sainsbury’s and Morrisons, the Cheshunt business continues to be whacked by the disintegration of the supermarket space — budget chains like Aldi are attracting shoppers away in their droves with their cheaper prices, while more affluent customers are driving into the likes of Waitrose instead.

These problems prompted yet another broker downgrade on Wednesday, this time by Credit Suisse. The boffins noted that “like-for-like sales continue to be negative at all three companies, but margins are declining even faster. We see no obvious path back to recent margin levels.” Still, Tesco and its rivals remain committed to a strategy of profit-denting discounting, even though years of such initiatives have failed to steady their market shares.

And with their high- and low-end rivals embarking on massive store roll-out programmes, I cannot see how these businesses will turn sales around. The City has pencilled in a 3% earnings decline for Tesco for the year concluding February 2016, a result that would mark a fourth consecutive drop. And given the murky revenues outlook, I believe that the stock is overdue a strong share price correction — an elevated P/E multiple of 24.1 times is hardly reflective of a company with such embedded structural problems.

Walker Greenback

Luxury furnisher Walker Greenback (LSE: WGB) electrified the market in midweek business and was recently trading 4.5% higher on the day. The Uxbridge firm noted strong trading performance so far in 2015, with a “continued strong trading performance in the UK along with an acceleration in international sales growth.”

Walker Greenback has seen total branded product sales surge 8.9% since February, with demand in its core British market rising 8.1% during the period. And incredibly the furnisher saw sales gallop 27.1% higher in the States. Its Anthology label is clearly making waves with foreign shoppers, and I expect demand for the company’s premium goods to continue climbing as consumer spending power advances.

Walker Greenback has a terrific record of generating earnings growth year after year, and the number crunchers do not expect this trend to cease any time soon. Indeed, a fractional uptick in the year concluding January 2016 is anticipated to improve by 6% in 2017, driving a reasonable P/E multiple of 17.2 times for this year to 16.1 times for the following period. With the firm investing heavily in product innovation and marketing, I expect the bottom line to keep swelling in the coming years.

Severfield

Like Walker Greenback, engineering specialists Severfield (LON: SFR) cheered the market today and were recently changing hands 1.9% higher. The firm saw underlying pre-tax profit double to £8.3m in the year ending March 2015 from £4m the previous year, while improving trading conditions helped the order book tick to £194m from £185m previously.

Following the results broker Edison noted that “the UK commercial construction cycle is still in relatively early stages of recovery and medium term prospects are somewhat better than the near term would suggest.” It added that despite the problem of falling bolts from Severfield’s ‘Cheesegrater’ building, “all other indicators are favourable and for those not fixated by the short term, Severfield represents an excellent geared play on medium term UK growth.”

This view is shared across the Square Mile, and Severfield is anticipated to record breakneck earnings growth of 52% and 49% in 2016 and 2017 respectively, shoving an earnings multiple of 20 times for this year to just 13.5 times for the following period. And with the engineer having agreed to reinstate the final dividend, a payout out 0.5p per share for last year is expected to advance to a total of 1.5p in 2016 and 2p for 2017, producing handy yields of 2.1% and 2.9%.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.